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ResMed, Inc. (NYSE:RMD)

F2Q13 Earnings Call

January 24, 2013 04:30 pm ET

Executives

Constance Bienfait – Director, Investor Relations

Peter C. Farrell – Founder, Chairman and Chief Executive Officer

Brett Sandercock – Chief Financial Officer

Don Darkin – President, SDB Strategic Business Unit

Michael J. Farrell – President, Americas

Robert Douglas – Chief Operating Officer

Analysts

Dan Hurren – UBS

David Clair – Piper Jaffray & Co.

Saul Hadassin – Credit Suisse

Benjamin Andrew – William Blair & Company

Matthew Prior – Bank of America Merrill Lynch

Bruce Du from – CDN

Michael Matson - Mizuho Securities

David Low – Deutsche Bank

Operator

Welcome to the Second Quarter ResMed Incorporated Earnings Conference Call. My name is Adrean, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. Please note this conference is being recorded.

I’d now like to turn the call over to Constance Bienfait, Director of Investor Relations at ResMed. Constance, you may begin.

Constance Bienfait

Thank you, Adrean, and thank you all for joining us today. The company has asked me to address certain matters. First, ResMed does not authorize the recording of any portion of this conference call for any purpose. Second, during the conference call, ResMed may make forward-looking statements such as projections of future revenue or earning, new product development, or new markets for the company’s products. These statements are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties exist that could cause actual results to materially differ from the forward-looking statements. These factors are discussed in ResMed’s SEC filings such as Forms 10-Q and 10-K, which you may access through the company’s website at www.resmed.com. Please limit your questions to two at anyone time and then you can place yourself back in the queue.

With that said, I would like to turn the call over to Peter Farrell, ResMed’s Chairman and CEO. Peter, go ahead.

Peter C. Farrel

Thank you coming for that exciting introduction. Thank you again for joining us and I will begin with some summary remarks and then turn the call over to Bret Sandercock, CFO for more financial details. And then of course, as usual take questions.

So first, a brief financial summary, which as I said Bret will fill in the details a little bit more later. We finished with another extremely robust quarter, you might be well and truly tired of hearing this. But this now represents a 72 consecutive record quarter for 18 straight calendar years in which we have grown the top line.

Global revenue in the second quarter of 2013 grew 13% to $377 million, up 14% on a constant currency basis. Revenue in the Americas grew 16% to $212 million and ROW revenue increased 10%, or 12% in constant currency terms to $165 million. We believe that our continued market growth has been driven by, primarily by two factors.

First, the fact that more people are finally beginning to accept that untreated sleep-disordered breathing is in fact the major public health problem.

And secondly our superior product quality coupled with our full solution offerings, which I will come back to in a moment. Net income for the quarter increased 24% to $78 million, while GAAP EPS increased 26% to $0.53 for the quarter. If we exclude amortization of acquired intangibles, EPS was a record $0.54.

Our global growth in flow generators this quarter was primarily driven again by our high-end devices with strong sales of AutoSet, bilevels, and our Adaptive Servo-Ventilation products, the VPAP Adapt, as well as Stellar 100 and 150 products.

And as we had originally anticipated, having our PAP products configured on the smaller quarter and more appealing S9 platform has worked out quite successfully. We also believe we continue to take share in the AutoSet space, as well as continued to gain back share in bilevels, and there is still a plenty of room for us to continue to grow.

The new EasyCare Online Compliance Management system continues to be adopted broadly and we are seeing solid uptick from both existing as well as new accounts.

Products and programs which provide superior therapy and better compliance, bring value to patients, customers, and payors. It’s all about driving outcomes for these constituencies and having the data to drive compliance and the hearings to improve lives and save healthcare costs is the right space to be.

With respect to Masks, all categories continued to do well. Mask Accessories also grew quite strongly, but large and small HMEs continue to see the benefits by themselves and patients and being able to be more systematic about supplying replenishment products to those patients who need them.

With the great success of our recent mask offerings, we are reaping the benefits of the great supply of these masks as patients remain happy to stay with what has been most comfortable and effective for them.

And I’m proud to announce that on behalf of the ResMed team, ResMed has emerged as the most preferred mask brand based upon a statistically significant global study done in the timeframe, August to September last year by UK-based market research firm, DVL Smith. The sleep apnea patient survey with current PEP users and use their device for at least four nights per week and they were all using every mask top that is full face, nasal or pillows, and also that we are using all brands.

Now immediately, we initiated and paid to the cost of the study, but we had no input whatsoever to the studies conclusions, so we’re very pleased about that. With that said, we are keeping a watchful eye on the recently released competitive masks. Also as an aside, we plan to launch our own suite of ResMed masks during the latter part of this year, or during this calendar year.

Turning to the rest of the world and despite the fact that there is still a lot of economic uncertainty in Europe, the UK, and Germany and France in particular. These territories, Germany, France, and the UK delivered solid quarterly results. And regardless of the challenging economic climate and covenant fiscal restraints, the market is still focused on treatment which keeps patients out of the hospital and keeps them healthy. Sleep-disordered breathing treatment does this in spades.

France has just initiated a new telemonitoring requirement to track complaints and we think this is an appropriate step and bodes well for us a period in the monitoring solutions. AutoSet CS, which is our Adaptive Servo-Ventilator product in Europe, and the Stellar products again did well in most parts of Europe. The Asia-Pacific region also had a solid quarter with robust sales in Japan, particularly with Stellar and also AutoSet CS, our ASP product as I said, as well as the Bi-Level product portfolio. There is also great focus on compliance in Japan with data capture hopefully lessening the need for so many physician visits, or at least shortening the time the patient needs to spend in the physicians’ office.

With respect to Ventilation, the VPAP ST-A is making inroads in most geographies. And as I’ve already mentioned sales of Stellar are quite robust, especially in Germany and Japan. In the U.S, we are in the process now of hiring respiratory care managers to go on referral points in hospitals. And we expect this to drive our home ventilation sales.

On the HST or Home sleep testing front, about 60% of commercially covered U.S adult lives are now under a pre-authorization requirement for attended PSG or Polysomnography in an effort by payers to steer providers and patients towards HST. This is anticipated together 75% of commercially covered loss by the spring.

We estimated the end of 2012 about 25% of all sleep tests for HST. And we expect this number to grow to 50% or over by the end of this calendar year. We continue to see a steady increase in the number of sleep labs involved in HST averaging about 35% in the last 12 months, which rose to 40% in November in response to pre-authorization enforcement. We are also involved in primary care physician awareness initiatives as HST continues to advance with PCP becoming increasingly more important in the diagnosis and management of the sleep apnea patient.

As flagged in the press release, we’ve been pioneering a market dynamic for several years that is now starting to get traction. The sleep market is not just about selling equipment in order to treat SDB, but it is about forming relationships with our customers, the HMEs and the payors. The combination of our range of high quality flow generators, the best and most comfortable masks and accessories and easy to access robust data makes ResMed in our view, the best value proposition for all providers. In short, we provide for full integration.

The sleep market is one of the first healthcare markets to actually provide useful treatment data and has done so for about a decade. Good growth would account for using EasyCare Online is evidence of its value. We feel we are also getting traction with payors in making the case for CPAP therapy.

With more understanding of the prevalence and severity of sleep-disordered breathing and obviously it’s association with chronic comorbidities such as heart failure, diabetes, good depression and so on, the case to reimburse SDB therapy and authorization and continues resupply makes more and more sense. And as evidenced by the shift to pre-authorization to PSG, payors understand that HST is making sleep testing easier and cheaper for everyone.

In addition, putting patients on Autoset rather than straight CPAP, even after in live sleep test is more efficient to the HME and in fact more effective for the patient.

As recognized time and again treating SDB has proven to be preventative from multitude of other more severe and costly care comorbidities certainly more costly than simply treating sleep-disordered breathing. In short, it is easy to make a compelling case for the payors. As we’ve noted many times over the diagnosis and treatment of SDB is the holy grail of medical treatment for three reasons. It drastically improves patients’ quality of life, it slows down and even improves concomitant kind of morbidities and additionally reduces in patient and out-patient costs.

Now, let me turn the call over to Brett for some additional financial detail, and then we’ll take question. So over to you Brett?

Brett Sandercock

Great, thanks, Peter. Revenue for the December quarter was $376.5 million, an increase of 13% over the prior year quarter. Unfavorable currency movements reduced our second quarter revenues by approximately $4.1 million. In constant currency terms, revenue increased by 14%. Income from operations for the quarter was $92.1 million, an increase of 37% over the prior year quarter.

Net income for the quarter was $77.9 million, an increase of 24% over the prior year quarter. Diluted earnings per share for the quarter were $0.53, an increase of 26% over the prior year quarter. Gross margin for the December quarter was 61.8%, up sequentially from Q1 FY13.

On a sequential basis our gross margin continue to benefit from a favorable product mix. Looking forward, we expect our gross margin for fiscal year 2013 to be in the range of 60% to 62%, assuming current exchange rates. We continue to execute on initiatives targeted at improving our global manufacturing supply chain and logistics cost structures.

SG&A expenses for the quarter were $107.8 million, an increase of 7% over the prior year quarter. In constant currency term, SG&A expenses increased by 8%. SG&A expenses as a percentage of revenue improved to 28.6% compared to the year ago figure of 30.2%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 28% to 29% for fiscal year 2013.

R&D expenses for the quarter were $30.3 million, an increase of 11% over the prior year quarter. In constant currency terms, R&D expenses also increased by 11%. R&D expenses as a percentage of revenue were 8.1% compared to the year ago figure of 8.2%.

Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2013, reflecting a continuing strong Australian dollar and also continued investment in our product pipeline.

Amortization of acquired intangibles was $2.5 million for the quarter, while stock-based compensation expense for the quarter was $9.5 million. Our effective tax rate for the quarter was 20.8% compared to the prior year quarter effective tax rate of 24.2%. The lower tax rate reflects the benefit of lower effective tax rate in our Singapore and Australian operations. We currently estimate our effective tax rate for fiscal year 2013 will be in the vicinity of 21% to 22%.

On December 7, 2012, the IRS released their final regulations for the medical devices excise tax. Following our valuation in the regulations, we believe a relatively small number of our products are subject to the medical device tax and as such estimate the annualized financial impact from the tax to be less than $1 million.

Turning now to revenue in more detail; overall sales in the Americas were $211.8 million, an increase of 16% over the prior year quarter. Sales outside the Americas totaled $164.7 million, an increase of 10% over the prior year quarter. In constant currency terms, sales outside the Americas increased by 12% over the prior year quarter.

Breaking out revenue between product segments; in the Americas, flow generator sales were $93.7 million, an increase of 16% over the prior year quarter, reflecting strong growth in our APAP and Bi-Level devices. Masks and other sales were $118.1 million, an increase of 16% over the prior year quarter, underpinned by strong contributions across our masks product range and continued growth in accessories.

For revenue outside the Americas, flow generator sales were $108.9 million, an increase of 9% over the prior year quarter and in constant currency terms, an increase of 11%. Masks and other sales were $55.9 million, an increase of 11% over the prior year quarter, or in constant currency terms, an increase of 16%. Globally, in constant currency terms, flow generator sales increased by 13% while masks and others increased by 16%.

Cash flow from operations was $93.6 million for the quarter, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $13.8 million, while depreciation and amortization for the December quarter totaled $19.3 million.

Our share buyback continues to play a major role in our capital management program. During the quarter, we repurchased 1 million shares for consideration of $40 million. For the first half of fiscal year 2013, we have repurchased 1.2 million shares for consideration of $48.1 million.

At the end of December, we had approximately 7.6 million shares remaining under our authorized buyback program. During fiscal year 2013, we intend to purchase at least 2 million shares under our share buyback program. In addition to our buyback program, our Board of Directors today declared a quarterly dividend of $0.17 per share consistent with our previously advised dividend policy.

Our balance sheet remains very strong. Net cash balances at the end of the quarter were $657 million. And at December 31, total assets stood at $2.3 billion and net equity was $1.8 billion.

I’ll now hand the call back to the operator for your questions.

Question-and-Answer Session

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) And we have Dan Hurren from UBS online with the question. Please go ahead.

Dan Hurren – UBS

Well, good morning, everyone, thanks for taking my question. I would just like to explore that a little bit about product launches and is there anymore detail on what product launches are required do you think to maintain growth as the comps gets tougher through the second half?

Peter C. Farrell

Well, Dan, as you are aware, we’ve been on this kick for many years and then we typically come out with new mask offering, somewhere in the timeframe of nine to 12 months, and new devices tend to be more like 18 months to two years. So this was just continuing what we normally do, but the focus is on improving comfort, reducing noise, and also attending to reduce COGS. But maybe I will throw that question for more detail to Don Darkin, and Don, would you like to say a few words about product releases?

Don Darkin

This is Don. We’ve currently had a fairly robust pipeline over the last three to five years. We are really just following that plan out. We’ve got a number of offerings in all segments coming through this calendar. And it’s just wisely relying about as planned previously. So as Peter mentioned, they are addressing the main high points of mainly in comfort and costs. But essentially they will be – we are fairly comfortable that they will be through this fiscal end calendar year launching.

Dan Hurren – UBS

Okay, thanks very much. And one just that is on a different track. Can you just remind us again on the potential new flow from the SERVE-HF study et cetera?

Peter C. Farrell

Right. At the end of January we’ll be pretty much at the full complement of patients for the study. But and we’ve got some studies ongoing which probably won’t complete their patient requirements until the end of May. But we are looking at a – still a couple of years. We had a meeting on the cardiovascular space just this week. And people are feeling pretty comfortable with the compliances being addressed the way it should be addressed that the units mainly in Germany, but also Germany and France together with the bulk of all the clinical centers. We seem to be on track, and people are quite satisfied with where we are, but it’s still early days in terms of any results. Perhaps I could also add we are planning a study which will be run in the U.S., not on IFU or an indications for use study, that is not an FDA approved study, but a study done with a prestigious university, well, let’s say, I will give it out, Duke. And we are just dotting the Is and crossing Ts for Chris O'Connor, who is the Chair of Cardiology at Duke, not everything has been put to bed, but we are going to do a study which doesn’t have mortality and morbidity as the endpoints, but rather six-minute walk quality of life, injection, fraction and so on, and we are actually quite excited by that, particularly based on some of the data that I’ve referred to before coming out of Japan.

Dan Hurren – UBS

Okay. And we shouldn't expect any study this year?

Peter C. Farrell

And we think that’s a study that, what you said Dan?

Dan Hurren – UBS

I'm sorry to interrupt. I just said that we shouldn't really expect any sort of incremental news this year from those studies.

Peter C. Farrell

No, I wouldn’t necessarily. You will get a lot of – we expect a lot of good anecdotal reports, but nothing perspective, randomized controlled trial, peer review stuff if you like. But…

Dan Hurren – UBS

All right.

Peter C. Farrell

But we will still be keeping you up to date with, met our analyses and smaller studies, if you like.

Dan Hurren – UBS

Great. Thank you very much.

Operator

(Operator Instructions) And we have David Clair online with questions from Piper Jaffray. Please go ahead.

David Clair – Piper Jaffray & Co.

Hi. Good afternoon, everybody. Thanks for taking my questions. First one, just, Peter, real quick, where do you think we are in the mix shift that's kind of been benefiting the flow generators? I mean how much more room for shifts at the higher-end devices do you think we have here?

Peter C. Farrell

Well, I think there is a fair amount of runway there David. I mean, it's sort of sticking your finger in the air to try to guess at it. But all I can say is the momentum is clearly there and you’re not going to see very much usage of sleep labs of pressure setting. And the fact is that there are now enough peer reviewed papers in the literature comparing our AutoSetting devices with fixed CPAP. And in fact, if you look carefully at the data, the data are more in favor of APAP than they are in favor of fixed CPAP in terms of compliance and compliance in terms of the number of hours patient spends on the device.

And it really makes no sense at all given those data and we’ve sold – how many APAPs you think we've sold now? I know it's somewhere in the 2 million area. I mean it’s not like we haven’t got pretty of data on these devices. And it makes no sense to go to a sleep lab to have the pressure set.

I mean it’s just you better off on an AutoSetting device, which is what we’ve been saying for the last decade and the data are now there to prove it. And it’s just an added inefficiency to go to a sleep lab to set a pressure. It’s an added expense, it makes no sense to send the money and you’re not getting any benefit, so we’d say continuing. And particularly now with 75%, shortly 75% of commercially covered lives requiring pre-authorization, this horse has got plenty of puff.

Dan Hurren – UBS

Okay. And then, for Brett, the tax rate guidance you provided and the gross margin guidance, I mean this quarter we were at the low on the tax side, and this is the second quarter in a row where gross margin has been north of that 61% midpoint. I mean, is this conservativism, or should we be expecting something in the back half of the year?

Brett Sandercock

Dan, I think as you can see, we've been sort of tracking at the high end of that range, and I suppose what I'd say is we're comfortable with that 60% to 62%. If you look at some of the product mix trends and they probably got some time to play out, then you could make the case that would be sort of the higher end of that range I suppose. But I would say, look, we're very comfortable with the range we’ve given. But as you can see that, trend-wise we’ve been at the higher end of that range.

Dan Hurren – UBS

And the tax rate, Brett?

Brett Sandercock

Yeah, the tax is really sort of reflects – sort of full-year tax calculations around the 21% to 22%, I think way we will be for the fiscal around that area.

Dan Hurren – UBS

Okay. Thanks guys. Congrats on a great quarter.

Brett Sandercock

Thanks, David.

Operator

We have Saul Hadassin from Credit Suisse online with the question. Please go ahead.

Saul Hadassin – Credit Suisse

Good morning. Can you hear me?

Peter C. Farrel

Yes, Saul.

Saul Hadassin – Credit Suisse

Thanks. Peter, just picking you up on your comments about the data suggesting that CPAP, in fact, gives more compliance with the AutoSet training devices. Does that give you more confidence or any confidence that you might actually see a HCPCS code from Medicare for the APAP device?

Peter C. Farrel

Well, Saul, that's been in the hopper for so long, I mean it's almost since the birth of my first child. There've been so – CMS has just drawn a line in the sand on that. It would be nice if it were to happen. I just don’t see it. I mean we went – in years past, we spent a lot of time providing data going back and explaining that this is a completely different animal because it gives roughly a 40% lull of pressure through the night. It tracks to what the patient actually needs in the upper airway. And therefore, QED it's a different animal. And they just haven’t accepted the logic, so I don’t expect that to change. It will be nice, but I just don’t expect it to change.

Saul Hadassin – Credit Suisse

Okay. Thanks and just one last question is also for you, Peter. You had some good color on the adaptive fee or the AutoSet in Europe and Japan. I'm just wondering how is that adaptive fee going in the US, and is that a device where you really need to wait for that data from the SERVE-HF study trial to see meaningful sales there?

Peter C. Farrell

Well, Saul, we’ve had data going back for almost a decade. And it's interesting when you look at the Japanese data and now it’s not. If you are looking at the U.S. market, the Japanese data would be considered not tight enough, not near the protocols, not enough focus on randomized control trials and so forth. But we did sort of introduce the data from 25 centers in Japan to various people here. And I’ve noted before that in Japan, cardiologists are actually doing the sleep studies themselves, I mean, it just so happens that the infrastructure there is conducive to that. But cardiologists are now putting patients onto adaptive servo ventilation treatment, the AutoSet CS without the patient having frank sleep disorder breathing.

And the reason is that they maintain, well first of all, there’s been nothing new under the sun and in the treatment of Congestive Heart Failure for decades or at least a couple of decades. And they know that the drying out of the lungs, drying out of the pleura area around the heart and the patients are just doing much better.

So we believe that by getting the word out to people that this will have an impact on the sales. Also, the fact that the SERVE-HF trials what we’ve seen particularly in Germany and France. What we’ve seen is the fact that you have seen your heart failure specialists who are involved in the study and they are seeing positive results with the patients and so we’re seeing an up tick in sales just by the fact that they are involving clinical trials.

So you’re right, but I don’t think we’re not sitting back, waiting for a couple of years for a study to be completed. We’re out there marketing the products and we’re doing whatever we can within the law and within the regulatory environment to draw people’s attention to have valid, we believe these data are.

Saul Hadassin – Credit Suisse

All right, thanks a lot Peter.

Peter C. Farrel

Thank you, Saul.

Operator

And we have Ben Andrew from William Blair on line with the question. Please go ahead.

Benjamin Andrew – William Blair & Company

Good afternoon Peter.

Peter C. Farrel

Ben, how are you?

Benjamin Andrew – William Blair & Company

I’m well thanks. A question for you relative to mix as well as kind of customer behavior, what chunk of the time do you, number one, see people start out a patient on an auto and downgrade them eventually just to kind of switch out that cheaper device? I understand the clinical argument favored, but what percent of the time do you actually see that? And do you anticipate it getting a bit more difficult to make the economic arguments after we get implementation of Round 2?

Peter C. Farrell

Gosh, Ben, I just we have no visibility to those sort of data at all. But look – asking, I mean I am not aware of any large scale switching to – I mean, I know some of the hybrid DMEs will use AutoSetting and then switch the patients to cheaper device, but I'll throw that to Mick, do you have any comment?

Michael J. Farrell

Yeah, Ben, that model may have applied five to 10 years ago with the ratio of an AutoSet to CPAP device was three to one. Now, you are talking more like a 1.25 to 1 and the delta, the price difference between the two, given the whole price compression that's been happening that 3% to 5% we talked over these last years is a minimal delta and $75 at least to get somebody to go to the patient's home and change the device and then you’ve got to ensure the settings are right, and you can have complications and return visits.

So the economic argument has driven to first time setup on APAC with all home sleep testing, but as we said in the preamble, some PSG testing is now looking at APAP applicator as well. And it’s because it drives compliance, adherence, and keeps the patient on therapy and adapts the changing needs, breathing position, change in drug regimen, change in weight, many, many factors.

So the mix shift from CPAP to APAP is industry wide and we believe that plays to our strengths where the Autoset is superior to its competitors in that category, and they really are very few players, I would say, looking at a VPAP or APAP initial period and then moving a patient down to basic CPAP, because of the long-term complications that they see in the changer and long-term upside basically in iPad keeping the patient on therapy and keeping the patient out of hospital for payer and high quality life of the patient and for HME keeping them coming back to order replenishment masks and accessories.

Brett Sandercock

So I guess you can summarize it then most things the inconvenience in with the current build between what does it cost you for an AutoSet and what it cost for a regular CPAP. But I mean it’s kind of like wide boarder?

Benjamin Andrew – William Blair & Company

Okay. And then, Peter, have you guys had conversations with any of the larger homecare dealers or even the GPOs that address some of those groups relative to their approach after Round 2? And again, we know the experience in Round 1. We've heard you guys answer that question quite a few times. But what sort of differential do you expect when you increase it by a factor of 10, and what sort of conversations are you having? Thank you.

Peter C. Farrel

Well, I haven’t had conversations. We all through that to Dave, Dave has been thinking about Round 2 quite a bit and maybe making comment. But Dave do you want to go first on that.

David Pendarvis

Sure, Ben, with regard to this use of AutoSet in connection with home sleep testing. I think a lot of that’s occurring more on the commercial side rather than the Medicare side. For example all of the pre-authorization requirements that have been a large part of driving the shift towards more at home diagnosis is on the commercial side, not on the Medicare. So I’m not sure any reimbursement changes on the therapy on the Medicare side really going to have a significant impact on this mix shift to auto.

But certainly we have conversations with trade associations about what should we be doing as an industry together with converse or with CMS and others about affecting competitive bidding on the progress and how CMS is rolling it out and how the various bills that are in Congress are passing. So we’re certainly talking with them about those types of issues. But I guess I would throw to make in terms of actual behavior. But I think our customers have gotten pretty comfortable overall with the idea that competitive bidding is coming in other MSAs that they didn't have it before. They don’t expect any large change in terms of customer behavior either in terms of how they’re guessing patient needs or equipment selection equipment selection or how they’re focusing on the business generally.

Unidentified Company Representative

The only thing I add to Dave’s comments, which is right on track is that, we’re partnering with customers. We have discussions with them everyday about the processing environment Round 2 could not have been more publicized, probably, frankly more so in our investor and analyst community than it is with our commercial discussions that we have on a daily basis, because its part of the course. We know its happening. We know its going to hit July 1.

Obviously they like on saying what the results were as they work through those results. But we’ve been having discussions with customers over the last two years on this. I know you asked not to use that expense in those nine cities for the 91, but as the business guy been involved in this, we have experienced that those discussions happen.

We partnered with the winners. So what we plan to do, when it goes 10x is partner with the winners again. And we have a pretty good idea of who that will be. The partners who think about long-term compliance and adherence and the people who will pick up those orphan patients from some of the small folks, who may go out of business, so we know the plan, we have got it ready to put in place and we partner with our customs on it.

So to summarize, Dave’s point, we are looking at the AAHomecare and the large industry groups, but we are also working with customers on the second front on a daily basis and we’re ready to grow through competitive bidding on too.

Benjamin Andrew – William Blair & Company

Great, thanks guys.

Operator

And we have Matthew Prior from Bank of America online with the question. Please go ahead.

Matthew Prior – Bank of America Merrill Lynch

Hi good morning guys. My two questions, are you guys focused on the contracts that you make? Mick, I guess compared to bidding Round 2, there’s been several delays. Can you give us any kind of thoughts you have around timing for the announcement of that?

And just I’m really interested in the pricing dynamics between CPAP and APAP given some manufacturers are pushing out lower pricing on CPAPs, you’re focusing on APAPs, HST forces the APAP to switch, and I guess I’m concerned somewhat that you could see more pricing aggression in CPAP that could drag down APAP as they fit under the same code?

Michael J. Farrell

Yeah, although I mean they are both on the E0601 code and we talk about that earlier, that’s not going to change. We tried that five times. But the mix shift to APAP will continue. There will continue to be price pressure on both CPAP and APAP in a competitive market that what’s happens.

Unfortunately, we don’t have any special intel as to why Washington is moving slowly, other than if the government and they’ve got 10 times the number of data coming through and probably the payment wasn’t much bigger than Round 1 looking at it. So we don’t have a date as to when that’s going to come. But we’re reasonably confident in our range of expectations as to what the reductions will be based up on Round 1 and some good surveys have been done across the group. But we’ll see the data when we come to it.

In terms of low-cost players in the CPAP space and its impact on APAP, there is certainly an impact there. But if you don’t have an APAP, you can’t compete in the category of the market requires an APAP. So it’s really two or three horse race, maybe four in that space. But it’s a category that we plan to grow, and we have the best algorithms, and we’ve done well so far. Connie, I don't know if you've any further intel into what’s happening with CMS on that front?

Constance Bienfait

As Mick said, we expect that any day now as it’s later than fall. So we’re hearing noises that maybe next week. But we don’t know anything more than the rest of you.

Matthew Prior – Bank of America Merrill Lynch

Yes, Thanks. That's good to hear to the extent they're keeping it all under wraps. But I guess my second question just focusing on that issue of compliance and more so informatics. Can you talk to what percentage now of the second and third tier DMEs are running a compliance system like EasyCare Online, and in your discussions with them in the late uptick competitive bidding? Do you think that's going to be a market share winner for ResMed or the other players?

Peter C. Farrell

I’ll hand the second part of this question on to Don Darkin, because his team put together the healthcare informatics play EasyCare Online, which is penetrating across the group, but in terms of looking at the T’s of HMEs in the U.S. market particularly, but across the America as the EasyCare Online was introduced, we had districts customers who have been on this platform for five to six years, who switched over within months, some of them weeks on to EasyCare Online.

The value proposition of EasyCare Online of having data available immediately in a very sort of outside Apple like user friendly iTunes like user friendly cloud environment has been incredibly powerful for not only the providers, the adjuvant providers, but really importantly the physicians who write the prescriptions and have access to those data.

And in future, to our customers’ customers, for the providers to provide those data to payers and even in the future to patients as well, but specifically two questions, second and third tier, sort of large regional in the mom and pops really have started to adopt EasyCare Online because it’s simple, it’s easy, and it’s available, and more and more prescriptions for connected S9 devices with wireless capability are coming to market, but those things been costliest sort of S curve adoption in EasyCare Online. I don’t know Don, if you have any further comments on Hi or EasyCare Online?

Don Darkin

Yeah, thanks Pete. Matt, we are pretty impressed with the uptake. In fact, it has gone much quicker than we expected, and it's pretty much of sort of provided across all the DME groups. What we are seeing now is a slight connection between the uptick on the data for EasyCare Online and a push in the growth as well in that space. So we’re quite pleased with that position.

And I’m expecting with a small – we’ve got a bunch of pending releases within that space both with EasyCare and some other software that we would continue to see a pretty big up tick in the adoption of that which also actually helps us with moving towards the APAP space as well for the data, so pretty positive.

Peter C. Farrell

And Matt just to add a bit more flavor you know on the issue of price pressures and cheaper products being available, if these guys can offer interim solutions and the robustness of the data management and the algorithms, I mean we’re just not seeing – look, I’m not saying we’re complacent, that’s the last thing we are, but we just don’t see this as being a big deal.

Constance Bienfait

One other quick note on the timing Matt, the CMS has planned a bunch of webinars for the bidders and other constituencies in February. So if the numbers don’t come out soon, they’re going to have to push back the schedule for the whole year quite a bit.

Matthew Prior – Bank of America Merrill Lynch

Okay, great. Thanks, guys.

Operator

And we have Bruce Du from CDN on line with question. Please go ahead.

Bruce Du from – CDN

Thanks, guys for taking my question. Just in terms of the masked replenishment, I know you've given some update before, but you don't have sort of great detail in terms of end-user replacements. But can I ask in terms of the sort of US mass replenishment rates, what do you think the market is at currently and in particular whether or not you've come to see sort of more, some of the small to midsize DMEs really starting to push the replenishment story?

Unidentified Company Representative

Well, there is no question that people are saying it as an opportunity and the more compliance improves and we have seen compliance improving effect talking to a guy who runs a small service company in Atlanta this morning and he surprised me by saying that they compliances 90%. So if you are getting that sort of compliance, you are going to obviously see impact on replenishment.

And if you get right back to when CMS changes the rules and you got a share 30 days consistent years within 90 days period of a patient put on CPAP, then you are forced to get into the health informatics or at least track what’s happening and that also cause people to improve their compliance. So that also has a very positive impact on replenishment, but the latest data I saw were it’s still of the order, in fact a little less than two masks, two cushions per patient per year, but I will turn to Mick for further comments.

Michael J. Farrell

Yeah Bruce and actually this dives back into Matt’s question about the different tiers of HMEs right, so the large nationals, to the quantification, the large nationals have all adopted replenishment and I would say are executing pretty well on the current sleep test and we are working and partnering with them on that. The large regions, more than 50% of doctors, but there is still a lot of runway left on that large regional space.

The mom and pops very much under penetrated in this space and we through EasyCare Online, that’s where it ties into Matt’s question, through EasyCare Online penetrating its way into that that sort of mom and pop and small regional space will give them the facility and capability and some other software elements that don’t into that that’s linked to our Umbian acquisition and usually platform is that start to become available throughout the HME space can give far more capability for this masked replenishment to take off.

So if reimbursement allows 12 cushions per patient per year and we are solved two cushions per patients per year, and we are sub two cushions per patient. You can see there is a lot left on the runway and mask systems is more penetrated, but that cushions area, there is a lot of work to drive, no matter what happens on the reimbursement front.

So it’s a balance across that and we are looking at how we empower the whole spectrum of our HME customer group across the small, medium and large segments and we have a team that is dedicated and focused to doing a consultant sales team that focus on this phase. So we are not just talking about it, we are taking action.

Bruce Du from – CDN

Great. And just my second one was just in relation to your early comments in terms of potentially some masks product launches towards the end of this calendar year. Just I guess, the recent product launches you've seen from your competitors, I guess what are you seeing in terms of the feedback and how they're doing in terms of the nasal pillow category and also the full face mask category with some of those guys have launched? What are you seeing from the competitor products thus far?

Peter C. Farrel

Well, you probably saw one of the analyst reports was that in the last day or so, comparing the quality of the masks and across the Board, whether it’s full face or whether it’s nasal pillows or the nasal masks and Mirage effects, we are just significantly above the others in terms of patients and physician acceptance. So our current offerings are actually pretty damn good, but you can always improve and Don and I were chatting just before Christmas or around Christmas while I was in Sydney and Don was showing me through the new masks in the hopper and they are just hugely impressive, but even without talking about JFU I think what we’ve got now is pretty good, you will in the future, we are not doing that, we continue to make improvements.

Now when others release masks typically what we get at is, we got go hope, people are going to try them, but so the Respironics offerings and they got offerings across those three spaces, full face and pillows and nasal. But we are still seeing better acceptance of our comp products and we expect that to continue. So you’ve got a blip, people try stuff, but now we are seeing it reverse.

Bruce Du from – CDN

Great thanks.

Operator

We’ve Michael Matson from Mizuho Securities online with questions. Please go ahead.

Michael Matson - Mizuho Securities

Thanks. I have trouble pronouncing it, too, sometimes. I guess, first of all, I guess I'm just curious there has been a lot of focus on the mix shift that you are clearly benefiting from with all the higher end products, but you know to the degree you're able or willing to answer it, I'm curious what you think the actual volume growth is in the market, both US and outside the US? Because, you know, the checks that I've been doing indicates that volume growth is actually pretty low, and obviously with these mix shifts, maybe you don't need a lot of volume growth, but I just want to see if I'm missing something, or does that seem reasonable?

Peter C. Farrel

Well, in terms of growth rates, we haven’t changed in the last couple of quarters, based on the information that’s coming from a variety of sources to us. So European growth is somewhere in the vicinity of 4% to 6%, 6% to 8% in the U.S. and maybe little nudged up a little higher in Asia/Pac, 8% to 10% in terms of the overall market growth in terms of the volume of devices.

Now in terms of our specific business, no question that the benefit of HSTs to AutoSet is a huge plus, and as you know and we mentioned in the press release, all our products are now in the S9 platform, that is we’ve seen this has had an extraordinary positive effect on the CPAP ST-A, but also on the adaptive servo ventilators, I mean we can bear in mind, there we went from an S7, which is almost like a car battery by comparison to this much more user-friendly lighter.

There were some changes in algorithm as well, we have gone to order rate, but so we have made improvements in both the size and to lesser extent the algorithms. And we're seeing if you like our Bi-Level business is coming back to where we believe it should be. And Michael, do you have any thing to add to that?

Michael J. Farrell

Yeah, hi, Mick and we saw your report that came out. I think one thing that when you look at the volumes and what the growth rate is and when we say the revenue growth rate in the Americas in 6% to 8%. It maybe that the volumes are slightly higher than that, I mean we have got mix shift as a positive, but then you’ve got ASP declines in the 5% range that is a negative factor on that as well. We haven’t talked publicly about volume numbers within devices, because we’re the only public company that goes into this space, and whatever information we use is heard by our competitors, but we don’t get the flip side of that.

But I think one area that maybe worthwhile adding to your research area is the leakage that happens throughout the pipeline when a patient goes into the pipeline. And patients sometimes when they get the referral onto PSG or HST leak out the system. Our research has shown when you have a choice between home sleep testing, particularly in PSG and even just offering the HST. You get less patients leaking out of the system.

So that would argue that even without the macroeconomic environment improving, which we think it probably is, you have that chance for lower leakage has HST goes from 12% a year ago to 25% this last calendar year to our projections are that is 35%, 45%, even some optimists at 50% by the end of this calendar year. So that leakage rate, we expect to reduce as home sleep testing comes to market. So that’s just another parts put in the equation of patient flow volumes.

Michael Matson - Mizuho Securities

All right, I guess I’m still a little confused just because it sounds like now you’re seeing that the pricing, obviously peer price has been down. But I assume mix was more than offsetting that, maybe the difference is you’re talking about the market more broadly, instead of ResMed specifically. But all right, so I guess my other question is just on Singapore. What portion of your production is going through Singapore at this point, and how much higher do you think that can go?

Peter C. Farrel

Well, we’re north of 15%. We’re heading to 75% and I don’t know Rob, do you want to make a comment on that?

Robert Douglas

Yes Mike, it just stays as part of the long-term plan. We are putting growth in our production into Singapore, we're holding other facility steady. What will happen is we'll hit some capacity living in Singapore and then evaluate our next steps. But it’s clear to say, that could easily go to 75%, but it will happen steadily and incrementally. We are also running production in Malaysia of headgear that was the result of an earlier acquisition of some business, so that’s picking up that number a bit as well and our supply teams continuing to work on that strategy but in our growing business we can do this in a very organized way.

Unidentified Company Representative

And a little bit of advertizing here for Singapore, last month I was down there and had the pleasure meeting with the economic development board at least their healthcare sector people. And when the Singapore government talks about business and government and academe working together they actually walk to talk and then nice to the other countries where we’re doing business, the United States or Australia they has done walk to talk, it’s more of an anti business environment there like, it can be with taxes or unionization of whatever it is but the Singaporean government, they’re just a pleasure, an absolute pleasure to work with

Michael Matson - Mizuho Securities

All right, thanks a lot.

Operator

And we have David Low from Deutsche Bank online with a question, please go ahead

David Low – Deutsche Bank

Thank very much. Just a question on, we heard a couple of stories that Respironics have experimented with a direct to consumer model. Just wondering what ResMed’s view is of that and whether you’ve benefited from any backlash from the, say the Respironics side pushback

Unidentified Company Representative

Well you know if you go back a couple of years ago maybe three or four years ago, Philips actually flagged if they were looking into direct-to-consumer, so we weren’t surprised by this statement to be honest. And Kroger is probably not a bad month to go where we have got 2000 outlets. But look I have heard a couple of stories that, there was one of the big DMEs and I listen you guys and they immediately withdrew, but then we heard that they only withdrew from the stores which were advertised, and it was still ongoing, but, Mick, you are closer to this than I am.

Michael J. Farrell

Hey, look, I think it’s a great question about Philips. Basically, for those on the call who may not know, Philips worked on a pilot experiment with supermarket/pharmacy chain called Kroger's, and they’ve sent a letter to the industry about this, I am not breaching anything to this, they have made public. Their approach and experimentation with a pilot trial with a mass retail channel was provocative in a market.

The immediate question from customers to us was, well, are you guys going to follow and we said no and here is why, we think it’s all about compliance and adherence, and ensuring that patient gets the best setup and the best chance to stick to seek that therapy. And that conversation with a physician, respiratory therapists, or some specialists in the space upfront talking about the comorbidities, heart failure, heart attack, hypertension, diabetes, morbid obesity upfront drives adherence. And the other part of it is just simple business models and what’s won.

When you look at brick and mortar book stores, they are going out of business, the Amazon. So why would a patient who is compliant and happy with their mask want to pickup a cushion at Kroger's when they include if let’s say, the HME had setup a good replenishment program and you could just click 1 on your phone or press Yes on a text or click on an iPhone app that maybe the HME had provided or through EasyCare Online or I’m getting it provided for the patient.

So we think the best business model will win is the one that drives best compliance and adherence, showing the return on care and that is better business model HMEs and it’s a wake-up call for HMEs. So if you don’t service the patients with cash model options, right, where it’s beyond reimbursement high deductible health plans, that someone else will fill that need.

So there wasn’t a huge backlash in the quarter. Our growth numbers were based on solid performance. But it was an interesting experiment and it helped us create some conversations with our HMEs about reimbursement, cash business and replenishment that we think it was in line with our conversations before and was a catalyst for further discussions about maybe penetrating those large regionals and large mom and pops as to and even the small guys about how to drive replenishment, because if you don’t do it, someone else will. That was a sort of experiment and summary from outside.

Peter C. Farrel

And if you’re looking at direct to consumer, I mean one thing you could think more about is that to be more along of lines of a diagnostic system, in other words, something alerting to you that you have poor sleep quality or whatever and that’s along the lines of sort of buying something in an Apple store or getting something from Omron measuring the wellness in this wellness category and then directing you to go to a sleep level, go to a sleep position or whatever.

And to Mick’s point, if you don’t get compliance, we all lose. And we’re, frankly, pretty delighted with what we’re hearing about compliance now, and surprisingly the government actually did something sensibly. So we’re even more surprised at that. But the CMS, the 90-day, 30-day continuous user steam has been a positive of the marketplace.

David Low – Deutsche Bank

Great. That's very helpful actually just on that same theme. Peter, you mentioned in France a change in requirements on telemonitoring. Can you give us a little bit more detail on what's exactly going on there, please?

Peter C. Farrell

Well, we are using the check book to force people to do data monitoring. You are going to get paid less if your device doesn’t provide the appropriate telemonitoring, but Rob maybe you can say a few words about that. But we consider – we are on lovely, I mean really strong position with EasyCare Online and U-Sleep from Umbian and so on, but Rob do you want to add some more flavor?

Robert Douglas

Yeah, I’d say the French bodies that are managing it, it really gets the economic case about sleep apnea and they want to make it even more efficient to treating, so there's been a discussion going on for about a year to implement this requirement for wireless monitoring effect of all patients and its been a tough discussion throughout the year, but its now reached a position where we know what to do.

We have actually got our EasyCare Online system running in France and working well and we’re going to provide the best online monitoring and the most efficient online monitoring service in France. It’s going to be a very good solution that we will be providing there and the French authorities want to see this start real soon, and around the middle of the year, they will be expecting all new patients to be wirelessly monitored to seek development.

Peter C. Farrell

And there is an economic incentive for people to do it for the healthcare providers, because they get paid more or they paid less if they don’t provide this. And so well actually, they will go out of business

Robert Douglas

The reimbursement effectively changes midyear. You get paid less if you’re not offering data monitoring

Peter C. Farrell

Well, the French reimbursement model, is sort of a fixed regular weekly fee, and that has got a plan for where that goes. And over time, like all issues in business, gradually decreases. But the rates, it won't decrease if you're on the telemonitoring. So it’s an effective price differential coming in there for that.

Operator

We are now at the one hour mark. So I will turn the call back over to Dr. Peter Farrell for his final remarks.

Peter C. Farrell

Thank you, Adrean. Yeah, thanks everybody for listening and I think we will call it quit. And except to say that another great quarter from our team and I want to congratulate all ResMed employees for doing just an absolutely splendid job once again for our 72 record quarter; that’s now 18 years, I sound like a broken record. So it’s a pretty good record, which we are extremely proud of. So thanks to the guys and the team.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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